Covid-19 and Commercial Contracts
The prevailing commercial environment is, thanks to Covid-19, somewhat precarious. Though the pandemic is, at its core, a human crisis it represents the biggest challenge businesses have had to face for many decades.
Two particular challenges, among many, have emerged: the issues of force majeure and the signing of contracts and other legal documents. For example, there are and will be many a business who find themselves in a situation where either it or another contractual party is unable to perform their obligations under the contract.
Force majeure
The guiding principle of common law in England and Wales is that the circumstances in which contractual obligations can be avoided are limited, usually only in the case of force majeure or frustration.
The issue undoubtedly conjures up memories of the ruling in Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102 where the Court of Appeal ruled that “impossibility is not a defence” to escape liability.
In that case, the contract could not be performed – in fact, it was impossible to do so – but that was ruled not relevant to the assessment of damages. The claimant sought to rely on a force majeure clause, however, the court ruled that on its construction of the clause, it was an exemption clause not a force majeure clause.
It’s clear that some businesses will be in a position where they cannot fulfil the terms of a contract in these unprecedented times. What’s less clear is whether a pandemic – as Covid-19 was declared by the World Health Organization on 11 March – amounts to a force majeure.
The commercial contract may well contain a force majeure clause absolving a non-performing party from non-performance in the event of a pandemic, war, etc, Typically, such a clause would need there to be a causal link between the event (here, the pandemic) and performance.
The actual wording must be considered carefully as to whether or not Covid-19 could be covered. It so, the effects of the pandemic on the contracts and its performance need to be assessed – the non-performing party cannot assume that if Covid-19 is covered by the clause it means it can escape liability for non-performance.
If, for instance, a party’s obligations are still possible albeit at additional cost, this would be unlikely to trigger the force majeure clause. It will depend on the terms of the contract as a whole and specialist advice should be taken.
Businesses should note that if the contract is governed by the laws in another jurisdiction, the rules may be different.
In the absence of a force majeure clause, a non-performing party might be able to rely on the doctrine of frustration, depending on the circumstances. Under this doctrine, a party can avoid the contract where there has been a change in circumstances essentially rendering the contract physically or commercially impossible to perform.
Signings
For the most part, arranging for commercial documentation to be signed by the parties should no longer be the problem it may have been even a year ago. This is because the Law Commission issued guidance last autumn that in commercial law and practice, it is legally acceptable to sign most legal deeds and documents digitally (a typed name or a tick, for instance).
The Law Commission had already confirmed that electronic signatures are as valid as traditional handwritten signatures when executing documents where a signature is required by statute (save for transfers and dispositions of land and property). However, there must also be a demonstrable intention to give legal authorisation by way of that signature.
None of us knows which way we are heading with Covid-19. But if you have any concerns about your contractual rights and obligations, take specialist advice from commercial solicitors.
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to hear from you